1.

A business has earned average profit of Rs.4,00,000 during the last few years and the normal rate of return in similar business is 10%. Find value of goodwill by:(i) Capitalisation of Super Profit Method, and(ii) Super Profit Method if the goodwill is valued at 3 years purchase of super profits.Assets of the business were Rs. 40,00,000 and its external liabilities Rs.7,20,000.

Answer»

(i) Capitalisation of Super Profit Method:

Step 1: Calculation of Capital Employed: 

Capital Employed = Assets - External Liabilities

= 4000000 - 720000

= 3280000

Step 2: Calculation of Normal Profit:

Normal Profit = 3280000 x [10/100] = 328000

Step 3: Calculation of Average Profit:

Average Profit = 400000

Step 4: Calculation of Super Profit:

Super Profit = 400000 - 328000

= 72000

Step 5: Calculation of Goodwill:

Goodwill = Super Profit x [100/Normal Rate Of Return]

= 72000 x [100/10]

= 720000

(ii) Super Profit Method:

Step 1: Calculation of Capital Employed: 

Capital Employed = Assets - External Liabilities

= 4000000 - 720000

= 3280000

Step 2: Calculation of Normal Profit:

Normal Profit = 3280000 x [10/100]

= 328000

Step 3: Calculation of Average Profit:

Average Profit = 400000

Step 4: Calculation of Super Profit:

Super Profit = 400000 - 328000 = 72000

Step 5: Calculation of Goodwill:

Goodwill = Super Profit x Number of years' of purchase

= 72000 x 3 

= 216000



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